Micron Technology, Inc.
MICRON TECHNOLOGY INC (Form: 10-Q, Received: 07/08/2013 16:39:35)


 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE   SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 30, 2013

OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to

Commission file number 1-10658

Micron Technology, Inc.
(Exact name of registrant as specified in its charter)
Delaware
75-1618004
(State or other jurisdiction of
(IRS Employer Identification No.)
incorporation or organization)
 
 
 
8000 S. Federal Way, Boise, Idaho
83716-9632
(Address of principal executive offices)
(Zip Code)
 
 
Registrant's telephone number, including area code
(208) 368-4000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   x    No   o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   x    No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.  (Check one):
Large Accelerated Filer x
Accelerated Filer o
Non-Accelerated Filer o
(Do not check if a smaller reporting company)
Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o  No x


The number of outstanding shares of the registrant's common stock as of July 1, 2013, was 1,038,475,112 .

 
 
 
 
 




PART I. FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS

MICRON TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions except per share amounts)
(Unaudited)

 
 
Quarter Ended
 
Nine Months Ended
 
 
May 30,
2013
 
May 31,
2012
 
May 30,
2013
 
May 31,
2012
Net sales
 
$
2,318

 
$
2,172

 
$
6,230

 
$
6,271

Cost of goods sold
 
1,762

 
1,938

 
5,091

 
5,522

Gross margin
 
556

 
234

 
1,139

 
749

 
 
 
 
 
 
 
 
 
Selling, general and administrative
 
127

 
156

 
369

 
481

Research and development
 
226

 
231

 
664

 
683

Restructure and asset impairments
 
55

 
5

 
94

 
11

Other operating (income) expense, net
 
(1
)
 
30

 
(17
)
 
37

Operating income (loss)
 
149

 
(188
)
 
29

 
(463
)
 
 
 
 
 
 
 
 
 
Interest income
 
2

 
3

 
8

 
7

Interest expense
 
(54
)
 
(56
)
 
(167
)
 
(126
)
Other non-operating income (expense), net
 
(45
)
 
(2
)
 
(263
)
 
24

 
 
52

 
(243
)
 
(393
)
 
(558
)
 
 
 
 
 
 
 
 
 
Income tax (provision) benefit
 
1

 
38

 
(3
)
 
31

Equity in net loss of equity method investees
 
(10
)
 
(115
)
 
(120
)
 
(262
)
Net income (loss)
 
43

 
(320
)
 
(516
)
 
(789
)
 
 
 
 
 
 
 
 
 
Net income attributable to noncontrolling interests
 

 

 
(2
)
 

Net income (loss) attributable to Micron
 
$
43

 
$
(320
)
 
$
(518
)
 
$
(789
)
 
 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 

 
 

 
 
 
 
Basic
 
$
0.04

 
$
(0.32
)
 
$
(0.51
)
 
$
(0.80
)
Diluted
 
0.04

 
(0.32
)
 
(0.51
)
 
(0.80
)
 
 
 
 
 
 
 
 
 
Number of shares used in per share calculations:
 
 
 
 
 
 
 
 
Basic
 
1,024.0

 
987.3

 
1,017.9

 
983.9

Diluted
 
1,046.6

 
987.3

 
1,017.9

 
983.9









See accompanying notes to consolidated financial statements.

1



MICRON TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(Unaudited)

 
 
Quarter Ended
 
Nine Months Ended
 
 
May 30,
2013
 
May 31,
2012
 
May 30,
2013
 
May 31,
2012
Net income (loss)
 
$
43

 
$
(320
)
 
$
(516
)
 
$
(789
)
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(7
)
 
8

 
2

 
(11
)
Gain (loss) on derivatives, net
 
(1
)
 
(2
)
 
(9
)
 
(17
)
Gain (loss) on investments, net
 
(1
)
 
(1
)
 
(2
)
 
(31
)
Pension liability adjustments
 

 
2

 
(1
)
 
2

Other comprehensive income (loss)
 
(9
)
 
7

 
(10
)
 
(57
)
Total comprehensive income (loss)
 
34

 
(313
)
 
(526
)
 
(846
)
Comprehensive (income) loss attributable to noncontrolling interests
 
(1
)
 
5

 
(3
)
 
5

Comprehensive income (loss) attributable to Micron
 
$
33

 
$
(308
)
 
$
(529
)
 
$
(841
)


































See accompanying notes to consolidated financial statements.

2



MICRON TECHNOLOGY, INC.

CONSOLIDATED BALANCE SHEETS
(in millions except par value amounts)
(Unaudited)

As of
 
May 30,
2013
 
August 30,
2012
Assets
 
 
 
 
Cash and equivalents
 
$
2,440

 
$
2,459

Short-term investments
 
112

 
100

Receivables
 
1,503

 
1,289

Inventories
 
1,732

 
1,812

Other current assets
 
99

 
98

Total current assets
 
5,886

 
5,758

Long-term marketable investments
 
347

 
374

Property, plant and equipment, net
 
6,830

 
7,103

Equity method investments
 
272

 
389

Intangible assets, net
 
331

 
371

Other noncurrent assets
 
389

 
333

Total assets
 
$
14,055

 
$
14,328

 
 
 
 
 
Liabilities and equity
 
 
 
 
Accounts payable and accrued expenses
 
$
1,590

 
$
1,641

Deferred income
 
223

 
248

Equipment purchase contracts
 
172

 
130

Current portion of long-term debt
 
357

 
224

Total current liabilities
 
2,342

 
2,243

Long-term debt
 
3,267

 
3,038

Other noncurrent liabilities
 
420

 
630

Total liabilities
 
6,029

 
5,911

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Micron shareholders' equity:
 
 
 
 
Common stock, $0.10 par value, 3,000 shares authorized , 1,034.7 s hares issued and outstanding (1,017.7 as of August 30, 2012)
 
103

 
102

Additional capital
 
9,076

 
8,920

Accumulated deficit
 
(1,920
)
 
(1,402
)
Accumulated other comprehensive income
 
69

 
80

Total Micron shareholders' equity
 
7,328

 
7,700

Noncontrolling interests in subsidiaries
 
698

 
717

Total equity
 
8,026

 
8,417

Total liabilities and equity
 
$
14,055

 
$
14,328








See accompanying notes to consolidated financial statements.

3



MICRON TECHNOLOGY, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
Nine Months Ended
 
May 30,
2013
 
May 31,
2012
Cash flows from operating activities
 
 
 
 
Net loss
 
$
(516
)
 
$
(789
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 

 
 

Depreciation expense and amortization of intangible assets
 
1,354

 
1,658

Amortization of debt discount and other costs
 
86

 
55

Losses from currency hedges, net
 
224

 
29

Equity in net loss of equity method investees
 
120

 
262

Noncash restructure and asset impairments
 
93

 
7

Stock-based compensation
 
61

 
71

Loss on extinguishment of debt
 
31

 

Change in operating assets and liabilities:
 
 

 
 

Receivables
 
(280
)
 
134

Inventories
 
38

 
182

Accounts payable and accrued expenses
 
42

 
(101
)
Customer prepayments
 
(95
)
 
296

Deferred income
 
(22
)
 
(61
)
Other
 
(42
)
 
(79
)
Net cash provided by operating activities
 
1,094

 
1,664

 
 
 
 
 
Cash flows from investing activities
 
 

 
 

Expenditures for property, plant and equipment
 
(964
)
 
(1,367
)
Purchases of available-for-sale securities
 
(574
)
 
(499
)
Payments to settle hedging activities
 
(216
)
 
(48
)
Additions to equity method investments
 

 
(180
)
Proceeds from sales and maturities of available-for-sale securities
 
592

 
63

Proceeds from sales of property, plant and equipment
 
23

 
51

Proceeds from settlement of hedging activities
 
23

 
31

Other
 
(54
)
 
(31
)
Net cash used for investing activities
 
(1,170
)
 
(1,980
)
 
 
 
 
 
Cash flows from financing activities
 
 

 
 

Proceeds from issuance of debt
 
812

 
1,065

Proceeds from equipment sale-leaseback transactions
 
106

 
403

Cash received for capped call transactions
 
24

 

Cash received from noncontrolling interests
 
11

 
151

Repayments of debt
 
(664
)
 
(152
)
Payments on equipment purchase contracts
 
(162
)
 
(132
)
Cash paid for capped call transactions
 
(48
)
 
(102
)
Distributions to noncontrolling interests
 
(33
)
 
(387
)
Acquisition of noncontrolling interests
 

 
(466
)
Other
 
11

 
(33
)
Net cash provided by financing activities
 
57

 
347

 
 
 
 
 
Net increase (decrease) in cash and equivalents
 
(19
)
 
31

Cash and equivalents at beginning of period
 
2,459

 
2,160

Cash and equivalents at end of period
 
$
2,440

 
$
2,191

 
 
 
 
 
Noncash investing and financing activities
 
 

 
 

Equipment acquisitions on contracts payable and capital leases
 
$
387

 
$
643

See accompanying notes to consolidated financial statements.

4



MICRON TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tabular amounts in millions except per share amounts)
(Unaudited)

Business and Basis of Presentation

Micron Technology, Inc. and its consolidated subsidiaries (hereinafter referred to collectively as "we," "our," "us" and similar terms unless the context indicates otherwise) is one of the world's leading providers of advanced semiconductor solutions. Through our worldwide operations, we manufacture and market a full range of DRAM, NAND Flash and NOR Flash memory, as well as other innovative memory technologies, packaging solutions and semiconductor systems for use in leading-edge computing, consumer, networking, automotive, industrial, embedded and mobile products. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America consistent in all material respects with those applied in our Annual Report on Form 10-K for the year ended August 30, 2012. In the opinion of our management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly our consolidated financial position and our consolidated results of operations, c omprehensive income and cash flows.

Certain reclassifications have been made to prior period amounts to conform to current period presentation, including restructure and asset impairment activities prior to the third quarter of 2013 that were previously reported in other operating (income) expense, net. In the second quarter of 2013, we reclassified gains and losses from changes in currency exchange rates in order to improve comparability with our industry peers. As a result of the reclassification, $59 million of losses for the first quarter of 2013 and $1 million and $14 million of losses for the third quarter and first nine months of 2012, respectively, were reclassified from the amounts previously reported in other operating (income) expense, net to other non-operating income (expense), net.

Our fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31. Our third quarters of fiscal 2013 and 2012 ended on May 30, 2013 and May 31, 2012 , respectively. All period references are to our fiscal periods unless otherwise indicated. These interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended August 30, 2012 .


Variable Interest Entities

We have interests in entities that are Variable Interest Entities ("VIEs"). If we are the primary beneficiary of a VIE, we are required to consolidate it. To determine if we are the primary beneficiary, we evaluate whether we have the power to direct the activities that most significantly impact the VIE's economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Our evaluation includes identification of significant activities and an assessment of our ability to direct those activities based on governance provisions and arrangements to provide or receive product and process technology, product supply, operations services, equity funding, financing and other applicable agreements and circumstances. Our assessments of whether we are the primary beneficiary of our VIEs require significant assumptions and judgments.

Unconsolidated Variable Interest Entities

Inotera: Inotera Memories, Inc. ("Inotera") is a VIE because its equity is not sufficient to permit it to finance its activities without additional support from its shareholders. In the second quarter of 2013, we entered into agreements with Nanya Technology Corporation ("Nanya") and Inotera to amend the joint venture relationship involving Inotera. These amendments included a new supply agreement between us and Inotera. We have determined that we do not have the power to direct the activities of Inotera that most significantly impact its economic performance, primarily due to (1) limitations on our governance rights that require the consent of other parties for key operating decisions and (2) Inotera's dependence on Nanya for financing and the ability of Inotera to operate in Taiwan. Therefore, we do not consolidate Inotera and we account for our interest under the equity method.


5



Transform: Transform Solar Pty Ltd. ("Transform") is a VIE because its equity is not sufficient to permit it to finance its activities without additional financial support from us or its parent, Origin Energy Limited ("Origin"). We have determined that we do not have the power to direct the activities of Transform that most significantly impact its economic performance, primarily due to limitations on our governance rights that require the consent of Origin for key operating decisions. Therefore, we do not consolidate Transform and we account for our interest under the equity method. As of August 30, 2012, Transform's operations were substantially discontinued.

For further information regarding our VIEs that we account for under the equity method, see "Equity Method Investments" note.

EQUVO Entities: EQUVO HK Limited and EQUVA Capital 1 Pte. Ltd. (together, the "EQUVO Entities") are special purpose entities created to facilitate equipment sale-leaseback financing transactions between us and a consortium of financial institutions that fund the sale-leaseback transactions ("Financing Entities"). Neither we nor the Financing Entities have an equity interest in the EQUVO Entities. The EQUVO Entities are VIEs because their equity is not sufficient to permit them to finance their activities without additional support from the Financing Entities and because the third-party equity holder lacks characteristics of a controlling financial interest. By design, the arrangements with the EQUVO Entities are merely financing vehicles and we do not bear any significant risks from variable interests with the EQUVO Entities. Therefore, we have determined that we do not have the power to direct the activities of the EQUVO Entities that most significantly impact their economic performance and we do not consolidate the EQUVO Entities.

Consolidated Variable Interest Entities

IMFT: IM Flash Technologies, LLC ("IMFT") is a VIE because all of its costs are passed to us and its other member, Intel Corporation ("Intel"), through product purchase agreements and IMFT is dependent upon us or Intel for any additional cash requirements.  We determined that we have the power to direct the activities of IMFT that most significantly impact its economic performance.  The primary activities of IMFT are driven by the constant introduction of product and process technology.  Because we perform a significant majority of the technology development, we have the power to direct its key activities.  In addition, IMFT manufactures certain products exclusively for us using our technology.  We also determined that we have the obligation to absorb losses and the right to receive benefits from IMFT that could potentially be significant to it.  Therefore, we consolidate IMFT.

MP Mask: MP Mask Technology Center, LLC ("MP Mask") is a VIE because substantially all of its costs are passed to us and its other member, Photronics, Inc. ("Photronics"), through product purchase agreements and MP Mask is dependent upon us or Photronics for any additional cash requirements.  We determined that we have the power to direct the activities of MP Mask that most significantly impact its economic performance, primarily because (1) of our tie-breaking voting rights over key operating decisions and (2) nearly all key MP Mask activities are driven by our supply needs.  We also determined that we have the obligation to absorb losses and the right to receive benefits from MP Mask that could potentially be significant to it.  Therefore, we consolidate MP Mask.

For further information regarding our consolidated VIEs, see "Consolidated Variable Interest Entities" note.


Pending Acquisition of Elpida Memory, Inc.

On July 2, 2012, we entered into an "Agreement on Support for Reorganization Companies" (the "Sponsor Agreement") with the trustees of Elpida Memory, Inc. ("Elpida") and its subsidiary, Akita Elpida Memory, Inc. ("Akita" and, together with Elpida, the "Elpida Companies"), which provides for, among other things, our acquisition of Elpida and our support for the plans of reorganization of the Elpida Companies in connection with their corporate reorganization proceedings in Japan. The Elpida Companies filed petitions for commencement of corporate reorganization proceedings with the Tokyo District Court (the "Japan Court") under the Corporate Reorganization Act of Japan on February 27, 2012 (the "Japan Proceeding"). On March 23, 2012, the Japan Court issued an order to commence the Japan Proceeding. Elpida filed a Verified Petition for Recognition and Chapter 15 Relief (the "U.S. Proceeding") in the United States Bankruptcy Court for the District of Delaware (the "U.S. Court") on March 19, 2012 and, on April 24, 2012, the U.S. Court entered an order that, among other things, recognized the Japan Proceeding as a foreign main proceeding pursuant to 11 U.S.C. § 1517(b). On February 26, 2013, the Elpida Companies' creditors approved the plans of reorganization of Elpida and Akita and on February 28, 2013, the Japan Court issued an order approving the plans of reorganization. Appeals filed by certain creditors of Elpida in Japan challenging the plan approval order issued by the Japan Court were denied. On June 25, 2013, the U.S. Court issued a recognition order, which recognized the order of the Japan Court approving the Elpida plan of reorganization.


6



In a related transaction, on July 2, 2012, we entered into a share purchase agreement (the "Rexchip Share Purchase Agreement") with Powerchip Technology Corporation, a Taiwanese corporation ("Powerchip"), and certain of its affiliates (collectively, the "Powerchip Group") to acquire the Powerchip Group's approximately 24% interest in Rexchip Electronics Corporation ("Rexchip"), a manufacturing joint venture formed by Elpida and Powerchip. For more information about the acquisition of the Rexchip shares from the Powerchip Group, see "Rexchip Share Purchase Agreement" below. Elpida currently owns, directly and indirectly through a subsidiary, approximately 65% of Rexchip's outstanding common stock. As a result, if the transactions contemplated by the Sponsor Agreement and the Rexchip Share Purchase Agreement are completed, we will own 100% of Elpida and, directly or indirectly through one or more of our subsidiaries, approximately 89% of Rexchip.

Elpida's assets include, among others: a 300 mm DRAM wafer fabrication facility located in Hiroshima, Japan; its ownership interest in Rexchip, whose assets include a 300 mm DRAM wafer fabrication facility located in Taiwan; and an assembly and test facility located in Akita, Japan. Elpida's semiconductor memory products include Mobile DRAM targeted toward mobile phones and tablets. We believe that combining the complementary product portfolios of Micron and Elpida will strengthen our position in the memory market and enable us to provide customers with a wider portfolio of high-quality memory solutions. We also believe that the Elpida transactions will strengthen our market position in the memory industry through increased research and development and manufacturing scale, improved access to core memory market segments, and additional wafer capacity to balance among our DRAM, NAND Flash and NOR Flash memory solutions. There can be no assurance that we will be able to successfully consummate the transactions described above.

Elpida Sponsor Agreement

Under the Sponsor Agreement, we committed to support plans of reorganization for the Elpida Companies that would provide for payments by the Elpida Companies to their secured and unsecured creditors in an aggregate amount of 200 billion yen (or the equivalent of approximately $1.98 billion , assuming approximately 101 yen per U.S. dollar, the exchange rate as of May 30, 2013 ), less certain expenses of the reorganization proceedings and certain other items.

The Sponsor Agreement provides that we will invest 60 billion yen (or the equivalent of approximately $593 million ) in cash in Elpida at the closing in exchange for 100% ownership of Elpida's equity. As a condition to the execution of the Sponsor Agreement, we deposited 1.8 billion yen (or the equivalent of approximately $18 million ) into an escrow account in July 2012, which will be applied toward our purchase price for the Elpida shares at closing. The Elpida Companies will use the proceeds of our investment to fund initial installment payments to their creditors of 60 billion yen, which amount is subject to reduction for certain items specified in the Sponsor Agreement. The initial installment payments will be made within three months following the closing of our acquisition of Elpida. The remaining 140 billion yen (or the equivalent of approximately $1.38 billion ) of installment payments payable to the Elpida Companies' creditors are scheduled to be made by the Elpida Companies in six annual installments payable at the end of each calendar year beginning in the calendar year after the first installment payments are made. We or one of our subsidiaries are committed to enter into a supply agreement with Elpida following the closing, which will provide for our purchase on a cost-plus basis of all product produced by Elpida. Cash flows from such supply agreement will be used to satisfy the required installment payments under the plans of reorganization. Although certain key parameters of the supply agreement have been agreed to with Elpida, the detailed terms have not been completed, and the final terms will be subject to Japan Court approval.

The Sponsor Agreement contains certain termination rights, including (i) in the event of a material adverse change affecting either Elpida and its subsidiaries or Rexchip disproportionate to industry trends or (ii) if our acquisition of Elpida has not closed by January 2, 2014, which date may be extended six months under certain limited circumstances.

The consummation of the Sponsor Agreement remains subject to satisfaction or waiver of certain conditions, including the closing of the purchase of the Rexchip shares from the Powerchip Group under the Rexchip Share Purchase Agreement described above.

There can be no assurance that the various conditions will be satisfied or that the Elpida Acquisition will ultimately be consummated on the terms and conditions set forth in the Sponsor Agreement. If the remaining closing conditions are not satisfied or waived, we will not be able to close the acquisitions. However, we believe the requirements for closing will be achieved and that we will close the acquisitions.


7



Summary Description of the Plans of Reorganization

Pursuant to the Sponsor Agreement, the trustees of the Elpida Companies prepared plans of reorganization for Elpida and Akita, which plans set forth the treatment of the Elpida Companies' pre-petition creditors and their claims utilizing the support contemplated by the Sponsor Agreement. Generally, Elpida's plan of reorganization provides that secured creditors will recover 100% of the amount of their fixed claims, whereas unsecured creditors will recover at least 17.4% of the amount of their fixed claims. The remaining portion of the unsecured claims are expected to be discharged, without payment, over the period that payments are made pursuant to the plans of reorganization. The creditors will be paid by Elpida in installments, with the first installment payment to occur within three months after the closing of Micron's acquisition of Elpida. The remaining installment payments will occur on the last business day of each calendar year over a six-year period beginning in the calendar year after the first installment payment is made. The secured creditors will be paid in full on or before the sixth installment payment date, while the unsecured creditors will be paid in seven installments. To the extent any claims remain unfixed as of the seventh installment payment date, an additional payment will be made to unsecured creditors once the remaining claims are finally fixed to the extent the remaining reserve exceeds the amounts payable with respect to the fixed claims. Akita's plan of reorganization provides that secured creditors will recover 100% of the amount of their claims, whereas unsecured creditors will recover 19% of the amount of their claims. The secured creditors of Akita will be paid in full on the first installment payment date, while the unsecured creditors will be paid in seven installments.

The initial installment payment to be made by the Elpida Companies pursuant to the plans of reorganization is 60 billion yen (or the equivalent of approximately $593 million ), which amount is subject to reduction for certain items specified in the Sponsor Agreement. The Elpida Companies will use the proceeds of Micron's investment at the closing of the Elpida acquisition to fund the initial installment payment. The remaining 140 billion yen (or the equivalent of approximately $1.38 billion ) of installment payments will be made by the Elpida Companies in six annual installments, with payments of 20 billion yen (or the equivalent of approximately $198 million ) in each of the first four installment payments, and payments of 30 billion yen (or the equivalent of approximately $297 million ) in each of the final two installment payments. Cash flows from the cost-plus supply agreement described above will be used to satisfy the second through seventh installment payments under the plans of reorganization.

Certain contingency matters related to the Elpida Companies, which are primarily comprised of outstanding litigation claims, were not treated as fixed claims under the plans of reorganization at the time the plans were filed with the Japan Court. A portion of each installment amount payable to the creditors of the Elpida Companies will be reserved in the event that any of these matters become fixed claims, in which case these fixed claims will be paid under the plans of reorganization in the same manner as the fixed claims of other creditors. To the extent the aggregate amounts reserved from the installment payments exceed the aggregate amounts payable with respect to these unfixed claims once they become fixed, the excess amounts reserved will be distributed to unsecured creditors with respect to their fixed claims, resulting in an increased recovery for the unsecured creditors out of the installment payments. To the extent the aggregate amounts reserved is less than the aggregate amounts payable with respect to these unfixed claims once they become fixed, the Elpida Companies would be responsible to fund any shortfall to ensure that the creditors receive the recovery to which they are entitled under the plans of reorganization with respect to these claims. As a result, there is a possibility that the total amount payable by the Elpida Companies to their creditors under the plans of reorganization will exceed 200 billion yen. In addition, if these unfixed claims are resolved pursuant to settlement arrangements or other post-petition agreements, a substantial portion of the amounts payable with respect to the claims may have to be funded by the Elpida Companies outside of the installment payments provided for by the plans of reorganization.

Micron Credit Support Arrangements with Respect to the Elpida Companies

Pursuant to the Sponsor Agreement, we agreed, subject to certain conditions, to provide certain support to Elpida with respect to obtaining financing for working capital purposes and capital expenditures. This support included a commitment to use reasonable best efforts to assist Elpida with the extension or replacement of Elpida's then-existing working capital credit facility through the closing of the Elpida acquisition, which assistance may include the provision of a payment guarantee by us under certain circumstances. Under the Sponsor Agreement, we also agreed, subject to certain conditions, to use reasonable best efforts to assist the Elpida Companies in financing up to 64 billion yen (or the equivalent of approximately $633 million ) of eligible capital expenditures incurred through June 30, 2014, including up to 40 billion yen (or the equivalent of approximately $395 million ) incurred prior to June 30, 2013, which may include us providing payment guarantees of third party financing under certain circumstances or direct financial support from Micron or one of its subsidiaries.


8



As of May 30, 2013 we provided a guarantee of Elpida's payments through December 2014 related to financing of capital expenditures with an outstanding borrowing of 5 billion yen (or the equivalent of approximately $50 million ). We also provided a guarantee of Elpida's payments relating to an extension of Elpida's existing working capital credit facility, with an outstanding borrowing as of May 30, 2013 of 8 billion yen (or the equivalent of approximately $79 million ). On June 28, 2013, Elpida's working capital credit facility matured and was repaid in full, relieving us of our payment guarantee. We have entered into an omnibus reimbursement agreement with Elpida in connection with our financial support obligations under the Sponsor Agreement, whereby Elpida and certain of its subsidiaries have agreed, among other things, to reimburse us for any amounts that we are required to pay under or in connection with the payment guarantees. These obligations under the omnibus reimbursement agreement are collateralized by approximately 93% of the Rexchip shares held by Elpida and one of its subsidiaries. In the event we are required to make any payments to Elpida's lenders under the guarantees, our rights will be subrogated to those of the lenders, including any rights to exercise remedies with respect to collateral securing the underlying loans. Failure to close the Elpida acquisition would not relieve us of our obligations under the foregoing payment guarantees. Under the Sponsor Agreement, certain conditions require Elpida's cash balances to be below a certain level in order for capital expenditure financing support to be available to Elpida. As of May 30, 2013, these conditions were not satisfied.  As a result, we would not be obligated to provide any such further support unless and until such conditions, as well as all other applicable conditions, are met. Although we were not obligated to do so, in June 2013, we provided an additional payment guarantee related to the financing of capital expenditures of an aggregate of $16 million in order for Elpida to obtain more favorable financing terms. The financing of Elpida is collateralized by certain of its semiconductor equipment.

Rexchip Share Purchase Agreement

On July 2, 2012, we entered into the Rexchip Share Purchase Agreement with the Powerchip Group, under which we will purchase approximately 714 million shares of Rexchip common stock, which represents approximately 24% of Rexchip's outstanding common stock, for approximately 10 billion New Taiwan dollars (or the equivalent of approximately $334 million , assuming approximately 30 New Taiwan dollars per U.S. dollar, the exchange rate as of May 30, 2013 ). The consummation of the Rexchip Share Purchase Agreement is subject to various closing conditions, including the closing of the transactions contemplated by the Sponsor Agreement. At the closing of the Sponsor Agreement and the Rexchip Share Purchase Agreement, we will own, directly or indirectly through one or more of our subsidiaries, approximately 89% of Rexchip.

Currency Hedging

Elpida Hedges: On July 2, 2012, we executed a series of separate currency exchange transactions pursuant to which we purchased call options to buy 200 billion yen with a weighted-average strike price of 79.15 (yen per U.S. dollar). In addition, to reduce the cost of these call options, we sold put options to sell 100 billion yen with a strike price of 83.32 and we sold call options to buy 100 billion yen with a strike price of 75.57 . These currency exchange transactions (the "Original Elpida Hedges") were settled on March 26, 2013 and we paid $191 million on settlement.

Upon settlement of the Original Elpida Hedges, on March 26, 2013, we executed a series of new separate currency exchange transactions to hedge our exposure to the yen-denominated acquisition payments under the Sponsor Agreement pursuant to which we entered into below-market forward contracts to buy 80 billion yen with a weighted-average price of 91.00 (yen per U.S. dollar) and purchased put options to sell 80 billion yen with a weighted-average strike price of 94.24 (the "New Elpida Hedges"). The New Elpida Hedges, which expire on September 25, 2013, mitigate the risk of a strengthening yen for certain of our yen-denominated payments under the Sponsor Agreement while preserving some ability for us to benefit if the value of the yen weakens relative to the U.S. dollar.

The forward and option contracts detailed above were not designated for hedge accounting and are remeasured at fair value each period with gains and losses reflected in our results of operations. As a result of the mark-to-market adjustments for the Original Elpida Hedges and the New Elpida Hedges (the "Elpida Hedges"), we recorded losses to other non-operating expense of $46 million and $222 million for the third quarter and first nine months of 2013, respectively. As of May 30, 2013 , our cumulative loss on the Elpida Hedges was $214 million .

Rexchip Hedges: On July 25, 2012, we purchased call options to buy 10 billion New Taiwan dollars with a weighted-average strike price of 29.21 (New Taiwan dollar per U.S. dollar). These options expired on April 2, 2013 and we paid $3 million on settlement. On April 9, 2013, we purchased call options for $1 million to buy 10 billion New Taiwan dollars with a strike price of 28.50 (New Taiwan dollar per U.S. dollar). These options expire on September 25, 2013. These option contracts were not designated for hedge accounting and were remeasured at fair value each period with gains and losses reflected in our results of operations.



9



Investments

As of May 30, 2013 and August 30, 2012 , available-for-sale investments, including cash equivalents, were as follows:

As of
 
May 30, 2013
 
August 30, 2012
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Money market funds
 
$
2,018

 
$

 
$

 
$
2,018

 
$
2,159

 
$

 
$

 
$
2,159

Corporate bonds
 
255

 
1

 

 
256

 
233

 
1

 

 
234

Government securities
 
96

 

 

 
96

 
144

 

 

 
144

Commercial paper
 
79

 

 

 
79

 
39

 

 

 
39

Asset-backed securities
 
72

 

 

 
72

 
77

 

 

 
77

Certificates of deposit
 
33

 

 

 
33

 
31

 

 

 
31

Marketable equity securities
 
10

 

 
(1
)
 
9

 
10

 

 

 
10

 
 
$
2,563

 
$
1

 
$
(1
)
 
$
2,563

 
$
2,693

 
$
1

 
$

 
$
2,694


As of May 30, 2013 , no available-for-sale security had been in a loss position for longer than 12 months.

The table below presents the amortized cost and fair value of available-for-sale debt securities, including cash equivalents, as of May 30, 2013 , by contractual maturity:

 
 
Amortized Cost
 
Fair Value
Money market funds not due at a single maturity date
 
$
2,018

 
$
2,018

Due in 1 year or less
 
198

 
198

Due in 1 - 2 years
 
140

 
141

Due in 2 - 4 years
 
181

 
181

Due after 4 years
 
16

 
16

 
 
$
2,553

 
$
2,554


Net unrealized holding gains reclassified out of accumulated other comprehensive income from sales of available-for-sale securities were $34 million in the second quarter of 2012 and were not significant for any other periods presented. Proceeds from the sales of available-for-sale securities were $346 million and $481 million for the third quarter and first nine months of 2013, respectively, and $18 million and $59 million for the third quarter and first nine months of 2012, respectively. Gross realized gains from sales of available-for-sale securities were $34 million for the second quarter of 2012 and were not significant for any other periods presented.


Receivables

As of
 
May 30,
2013
 
August 30,
2012
Trade receivables (net of allowance for doubtful accounts of $5 and $5, respectively)
 
$
1,250

 
$
933

Related party receivables
 
56

 
63

Income and other taxes
 
51

 
80

Other
 
146

 
213

 
 
$
1,503

 
$
1,289


As of May 30, 2013 and August 30, 2012 , related party receivables included $56 million and $62 million , respectively, due from Aptina primarily for sales of image sensors under a wafer supply agreement.  

10




As of May 30, 2013 and August 30, 2012 , other receivables included $1 million and $63 million , respectively, from our currency hedges. As of May 30, 2013 and August 30, 2012 , other receivables included $38 million and $34 million , respectively, due from Intel for amounts related to NAND Flash and certain emerging memory technologies product design and process development activities under cost-sharing agreements.  As of August 30, 2012 , other receivables also included $17 million due from Nanya for amounts related to DRAM product design and process development activities under a cost-sharing agreement. (See "Derivative Financial Instruments," "Consolidated Variable Interest Entities" and "Equity Method Investments" notes.)


Inventories

As of
 
May 30,
2013
 
August 30,
2012
Finished goods
 
$
453

 
$
512

Work in process
 
1,169

 
1,148

Raw materials and supplies
 
110

 
152

 
 
$
1,732

 
$
1,812



Property, Plant and Equipment

As of
 
May 30,
2013
 
August 30,
2012
Land
 
$
90

 
$
92

Buildings
 
4,605

 
4,714

Equipment
 
15,050

 
15,653

Construction in progress
 
61

 
43

Software
 
305

 
323

 
 
20,111

 
20,825

Accumulated depreciation
 
(13,281
)
 
(13,722
)
 
 
$
6,830

 
$
7,103


Depreciation expense was $421 million and $1,292 million for the third quarter and first nine months of 2013, respectively, and $502 million and $1,591 million for the third quarter and first nine months of 2012, respectively. Other noncurrent assets included buildings, equipment and other assets classified as held for sale of $31 million as of May 30, 2013 and $25 million as of August 30, 2012 .


Equity Method Investments

As of
 
May 30, 2013
 
August 30, 2012
 
 
Investment Balance
 
Ownership Percentage
 
Investment Balance
 
Ownership Percentage
Inotera
 
$
259

 
35.5
%
 
$
370

 
39.7
%
Other
 
13

 
Various

 
19

 
Various

 
 
$
272

 
 

 
$
389

 
 



11



We recognize our share of earnings or losses from these entities under the equity method, generally on a two-month lag.  Equity in net loss of equity method investees, net of tax, included the following:

 
 
Quarter Ended
 
Nine Months Ended
 
 
May 30,
2013
 
May 31,
2012
 
May 30,
2013
 
May 31,
2012
Inotera
 
$
(13
)
 
$
(38
)
 
$
(121
)
 
$
(157
)
Other
 
3

 
(77
)
 
1

 
(105
)
 
 
$
(10
)
 
$
(115
)
 
$
(120
)
 
$
(262
)

As of May 30, 2013, our maximum exposure to loss from our involvement with our equity method investments that were VIEs was $262 million and primarily included our Inotera investment balance.  We may also incur losses in connection with our rights and obligations to purchase substantially all of Inotera's wafer production capacity under a supply agreement with Inotera.

Inotera

We have partnered with Nanya in Inotera, a Taiwanese DRAM memory company, since the first quarter of 2009.  As of May 30, 2013 , we held a 35.5% ownership interest in Inotera, Nanya held a 36.1% ownership interest and the remaining ownership interest was publicly held. On May 28, 2013, Inotera issued 634 million common shares to Nanya and certain of its affiliates in a private placement at a price equal to 9.47 New Taiwan dollars per common share (approximately $0.32 U.S. dollars as of May 28, 2013), which was in excess of our carrying value per share. As a result of the issuance, our ownership interest decreased from 39.7% to 35.5% and we expect to recognize a gain of approximately $48 million in the fourth quarter of 2013. In March 2012, we contributed $170 million to Inotera, which increased our ownership interest from 29.7% to 39.7% .

As of May 30, 2013 , based on the closing trading price of Inotera's shares, the market value of our equity interest in Inotera was $854 million . As of May 30, 2013 and August 30, 2012 , there were gains of $51 million and $49 million , respectively, in accumulated other comprehensive income (loss) for cumulative translation adjustments from our equity investment in Inotera.

The net carrying value of our initial and subsequent investments was less than our proportionate share of Inotera's equity at the time of each of those investments.  These aggregate differences are being amortized as a net credit to earnings through equity in net loss of equity method investees (the "Inotera Amortization").  For the third quarter and first nine months of 2012, we recognized $12 million and $36 million , respectively, of Inotera Amortization. As of August 30, 2012 , the remaining amount of unrecognized Inotera Amortization was not significant.

Inotera incurred net losses of $24 million for its first quarter ended March 31, 2013. Also, Inotera's current liabilities exceeded its current assets by $1.68 billion as of March 31, 2013, which exposes Inotera to liquidity risk. As of December 31, 2012, Inotera was not in compliance with certain loan covenants and had not been in compliance for the past several years. Inotera received a waiver from complying with the December 31, 2012 financial covenants. Inotera's management has developed plans to improve its liquidity, but there can be no assurance that Inotera will be successful in improving its liquidity, which may result in its lenders requiring repayment of such loans during the next year.

On January 17, 2013, we entered into agreements with Nanya and Inotera to amend the joint venture relationship involving Inotera. The amendments included a new supply agreement (the "Inotera Supply Agreement"), retroactively effective beginning on January 1, 2013, between us and Inotera under which we are obligated to purchase for an initial three-year term substantially all of Inotera's output at a purchase price based on a discount from market prices for our comparable components. The Inotera Supply Agreement contemplates annual negotiations with respect to potential successive one-year extensions and if in any year the parties do not agree to an extension, the agreement will terminate following the end of the then-existing term plus a subsequent three-year wind-down period. Our share of Inotera's capacity would decline over the three year wind-down period. Under applicable accounting guidance, the Inotera Supply Agreement is treated as containing an embedded operating lease with respect to Inotera's production assets during the initial three-year term of the lease. Effective through December 31, 2012, we had rights and obligations to purchase 50% of Inotera's wafer production capacity based on a margin-sharing formula among Nanya, Inotera and us. Under these agreements, we purchased $341 million and $742 million of DRAM products for the third quarter and first nine months of 2013, respectively, and $178 million and $476 million for the third quarter and first nine months of 2012, respectively.


12



Under a cost-sharing arrangement effective through December 31, 2012, we generally shared DRAM development costs with Nanya. As a result of the January 17, 2013 agreements, which were retroactively effective beginning on January 1, 2013, Nanya no longer participates in the joint development program. Pursuant to the cost-sharing arrangement, our research and development ("R&D") costs were reduced by $19 million in the first six months of 2013 and $35 million and $108 million for the third quarter and first nine months of 2012, respectively. (See "Variable Interest Entities" note.)

Other

Transform: In the second quarter of 2010, we acquired a 50% interest in Transform, a developer, manufacturer and marketer of photovoltaic technology and solar panels, from Origin.  As of May 30, 2013 , we and Origin each held a 50% ownership interest in Transform.  As a result of the ongoing challenging global environment in the solar industry and unfavorable worldwide supply and demand conditions, in May 2012 the Board of Directors of Transform approved a liquidation plan. As a result of the liquidation plan, we recognized a charge of $69 million for the third quarter of 2012, which reduced the carrying value of our investment in Transform to zero . As of August 30, 2012, Transform's operations were substantially discontinued.

Aptina: Other equity method investments included a 30.2% equity interest in Aptina. The amount of cumulative loss we recognized from our investment in Aptina through the second quarter of 2012 reduced the carrying value of our investment balance to zero and we ceased recognizing our proportionate share of Aptina's losses.

Through May 3, 2013, we manufactured components for CMOS image sensors for Aptina under a wafer supply agreement.  For the third quarter and first nine months of 2013, we recognized net sales of $61 million and $170 million , respectively, from products sold to Aptina, and cost of goods sold of $70 million and $208 million , respectively. For the third quarter and first nine months of 2012, we recognized net sales of $99 million and $292 million , respectively, from products sold to Aptina, which approximated our costs. On May 3, 2013, we assigned to LFoundry Marsica S.r.l. ("LFoundry") our supply agreement with Aptina to manufacture image sensors at our 200 mm Avezzano facility. (See "Restructure and Asset Impairments - Micron Technology Italia, S.r.l." note.)

In connection with the sale of our 200mm Avezzano facility to LFoundry, on May 22, 2013, we entered into a short-term, interest-free, unsecured loan agreement with Aptina that allows Aptina to borrow up to $45 million , drawn at their option, in three equal tranches through July 2013. Principal amounts drawn are due in three equal payments from September, 2013 to January, 2014. As of May 30, 2013, other current assets included $15 million for amounts due under the short-term loan agreement. Subsequent to the third quarter of 2013, on June 3, 2013 and July 3, 2013, Aptina drew the remaining $30 million available under this loan agreement.


Intangible Assets

As of
 
May 30, 2013
 
August 30, 2012
 
 
Gross
Amount
 
Accumulated
Amortization
 
Gross
Amount
 
Accumulated
Amortization
Product and process technology
 
$
580

 
$
(266
)
 
$
575

 
$
(234
)
Customer relationships
 
127

 
(110
)
 
127

 
(98
)
Other
 
1

 
(1
)
 
1

 

 
 
$
708

 
$
(377
)
 
$
703

 
$
(332
)

During the first nine months of 2013 and 2012 , we capitalized $24 million and $39 million , respectively, for product and process technology with weighted-average useful lives of 10 years and 9 years, respectively.

Amortization expense was $21 million and $62 million for the third quarter and first nine months of 2013 , respectively, and $23 million and $67 million for the third quarter and first nine months of 2012 , respectively.  Annual amortization expense is estimated to be $83 million for 2013 , $77 million for 2014 , $60 million for 2015 , $52 million for 2016 and $41 million for 2017 .




13



Accounts Payable and Accrued Expenses

As of
 
May 30,
2013
 
August 30,
2012
Accounts payable
 
$
736

 
$
818

Related party payables
 
228

 
130

Salaries, wages and benefits
 
216

 
290

Customer advances
 
166

 
141

Income and other taxes
 
31

 
25

Other
 
213

 
237

 
 
$
1,590

 
$
1,641


As of May 30, 2013 and August 30, 2012 , related party payables included $228 million and $130 million , respectively, due to Inotera primarily for the purchase of DRAM products under the Inotera Supply Agreement.

As of May 30, 2013 and August 30, 2012 , customer advances included $163 million and $139 million , respectively, for amounts received from Intel to be applied to Intel's future purchases under a NAND Flash supply agreement. In addition, as of August 30, 2012 , other noncurrent liabilities included $120 million of amounts received under this agreement. (See "Consolidated Variable Interest Entities – IM Flash" note.)

As of May 30, 2013 and August 30, 2012 , other accounts payable and accrued expenses included $24 million and $51 million , respectively, of liabilities associated with currency hedges executed in connection with the Sponsor Agreement and Rexchip Share Purchase Agreement. As of May 30, 2013 and August 30, 2012 , other accounts payable and accrued expenses included $8 million and $14 million , respectively, due to Intel for NAND Flash product design and process development and licensing fees pursuant to cost-sharing agreements. (See "Derivative Financial Instruments" and "Consolidated Variable Interest Entities – IM Flash" notes.)




14



Debt

As of
 
May 30,
2013
 
August 30,
2012
Capital lease obligations, due in periodic installments, weighted-average remaining term of 3.6 years and weighted-average rate 4.5% as of May 30, 2013
 
$
912

 
$
883

2032C convertible senior notes, due May 2032, holder can put back May 2019 (1) , stated rate 2.375%, effective rate 6.0%, net of discount of $90 and $99, respectively (2)
 
460

 
451

2014 convertible senior notes, due June 2014, stated rate 1.875%, effective rate 7.9%, net of discount of $27 and $89, respectively (2)
 
458

 
860

2032D convertible senior notes, due May 2032, holder can put back May 2021 (1) , stated rate 3.125%, effective rate 6.3%, net of discount of $83 and $89, respectively (2)
 
367

 
361

2031A convertible senior notes, due August 2031, holder can put back August 2018 (1) , stated rate 1.5%, effective rate 6.5%, net of discount of $71 and $80, respectively
 
274

 
265

2033E convertible senior notes, due February 2033, holder can put back February 2018 (1) , stated rate 1.625%, effective rate 4.5%, net of discount of $30
 
270

 

2033F convertible senior notes, due February 2033, holder can put back February 2020 (1) , stated rate 2.125%, effective rate 4.9%, net of discount of $41
 
259

 

2031B convertible senior notes, due August 2031, holder can put back August 2020 (1) , stated rate 1.875%, effective rate 7.0%, net of discount of $94 and $102, respectively
 
251

 
243

Term note payable, due in periodic installments through January 2018, stated rate 2.4%
 
195

 

2027 convertible senior notes, due June 2027, holder can put back June 2017 (1) , stated rate 1.875%, effective rate 6.9%, net of discount of $30 and $34, respectively
 
145

 
141

Intel senior note, due in periodic installments through April 2014, variable rate
 
33

 
58

 
 
3,624

 
3,262

Less current portion
 
(357
)
 
(224
)
 
 
$
3,267

 
$
3,038

(1) Holders of these notes have the right to require us to repurchase all or a portion of their notes on the dates specified.
(2) For these notes, we have the option to pay cash for the aggregate amount due upon conversion. It is our current intent to settle the principal amount of these notes in cash upon conversion. As a result, the notes are considered in diluted earnings per share under the treasury stock method.

Capital Lease Obligations

For the third quarter of 2013, we received $33 million in proceeds from equipment sale-leaseback transactions and as a result recorded capital lease obligations aggregating $33 million at a weighted-average effective interest rate of 3.9% , payable in periodic installments through June 2017 . In the first nine months of 2013, we received $106 million in proceeds from equipment sale-leaseback transactions and as a result recorded capital lease obligations aggregating $106 million at a weighted-average effective interest rate of 4.4% , payable in periodic installments through June 2017 .

Partial Repurchase of the 2014 Notes

On February 12, 2013, we repurchased $464 million of aggregate principal amount of our 1.875% Convertible Senior Notes due June 2014 (the "2014 Notes") for $477 million in privately negotiated transactions. The liability and equity components of the 2014 Notes were stated separately pursuant to the accounting standards for convertible debt instruments that may be fully or partially settled in cash upon conversion. Accordingly, the repurchase resulted in the derecognition of $431 million in debt for the principal amount (net of $33 million of debt discount) and $15 million in additional capital for the equity component. We recognized a charge of $31 million associated with the early repurchase, based on the estimated $462 million fair value of the debt component and the $431 million carrying value (net of unamortized discount) of the notes repurchased. The fair value of the debt component was estimated using an interest rate for non-convertible debt, with terms similar to the debt component of the 2014 Notes on a stand-alone basis issued by entities with credit ratings similar to ours at the repurchase date (Level 2 fair value measurements).


15



2033E and 2033F Notes

On February 12, 2013, we issued $300 million of 1.625% Convertible Senior Notes due February 2033 (the "2033E Notes") and $300 million of 2.125% Convertible Senior Notes due February 2033 (the "2033F Notes" and together with the 2033E Notes, the "2033 Notes"). Issuance costs for the 2033 Notes totaled $16 million . The initial conversion rate for the 2033 Notes is 91.4808 shares of common stock per $1,000 principal amount, equivalent to an initial conversion price of approximately $10.93 per share of common stock. Interest is payable in February and August of each year.

Upon issuance of the 2033 Notes, we recorded $526 million of debt, $72 million of additional capital and $14 million of deferred debt issuance costs (included in other noncurrent assets). The amount recorded as debt was based on the fair value of the debt component as a standalone instrument and was determined using an average interest rate for similar nonconvertible debt issued by entities with credit ratings comparable to ours at the time of issuance (Level 2 fair value measurements). The difference between the debt recorded at inception and the principal amount ( $31 million for the 2033E Notes and $43 million for the 2033F Notes) is being accreted to principal as interest expense through February 2018 for the 2033E Notes and February 2020 for the 2033F Notes, the expected life of the notes.

Conversion Rights : Holders may convert their 2033 Notes under the following circumstances: (1) if the 2033 Notes are called for redemption; (2) during any calendar quarter if the closing price of our common stock for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is more than 130% of the conversion price (approximately $14.21 per share) of the 2033 Notes; (3) if the trading price of the 2033 Notes is less than 98% of the product of the closing price of our common stock and the conversion rate of the 2033 Notes during the periods specified in the indenture; (4) if specified distributions or corporate events occur, as set forth in the indenture for the 2033 Notes; or (5) at any time after November 15, 2032.

Upon conversion, we will pay cash equal to the lesser of the aggregate principal amount and the conversion value of the notes being converted and cash, shares of common stock or a combination of cash and shares of common stock, at our option, for any remaining conversion obligation. As a result, the 2033 Notes are considered in diluted earnings per share under the treasury stock method.

Cash Redemption at Our Option : We may redeem for cash the 2033E Notes on or after February 20, 2018 and the 2033F Notes on or after February 20, 2020. The redemption price will equal the principal amount plus accrued and unpaid interest.

Cash Repurchase at the Option of the Holder : We may be required by the holders of the 2033 Notes to repurchase for cash all or a portion of the 2033E Notes on February 15, 2018 and on February 15, 2023 and all or a portion of the 2033F Notes on February 15, 2020 and on February 15, 2023. The repurchase price is equal to the principal amount plus accrued and unpaid interest. Upon a change in control or a termination of trading, as defined in the indenture, holders of the 2033 Notes may require us to repurchase for cash all or a portion of their 2033 Notes at a repurchase price equal to the principal amount plus accrued and unpaid interest.

Term Note Payable

On October 2, 2012, we entered into a facility agreement to obtain financing collateralized by semiconductor production equipment.  Subject to customary conditions, we could draw up to $214 million under the facility agreement.  Amounts drawn are payable in 10 equal semi-annual installments beginning six months after the draw date.  On October 18, 2012, we drew $173 million with interest at 2.4% per annum.  On January 31, 2013, we drew the remaining $41 million with interest at 2.4% per annum. The facility agreement contains customary covenants and events of default.

Revolving Credit Facility

On September 5, 2012, we entered into a three -year revolving credit facility. Under this credit facility, we can draw up to the lesser of $255 million or 80% of the net outstanding balance of certain trade receivables. Amounts drawn would be collateralized by a security interest in such receivables. The availability of the facility is subject to certain customary conditions, including the absence of any event or circumstance that has a material adverse effect on our business or financial condition. The revolving credit facility contains customary covenants and a repayment provision in the event that the maximum aging of the receivables exceeds a specified threshold. Interest is payable monthly on any outstanding principal balance at a variable rate equal to the 30-day Singapore Interbank Offering Rate ("SIBOR") plus 2.8% per annum. As of May 30, 2013 , we had not drawn any amounts under this facility.


16



Subsequent Events - Financing

On June 27, 2013, we entered into a senior secured three -year revolving credit facility, collateralized by a security interest in certain trade receivables. Under this facility, we can draw up to 85% of the net outstanding balance of certain trade receivables, subject to certain adjustments, including an availability block that has the effect of limiting the maximum committed draw amount to approximately $153 million . The revolving credit facility contains customary covenants and conditions, including as a funding condition the absence of any event or circumstance that has a material adverse effect on our business or financial condition.  Generally, interest is payable on any outstanding principal balance at a variable rate equal to the London Interbank Offered Rate (“LIBOR”) plus a spread from 1.5% to 2.0% , or at our option, at a rate equal to an alternate base rate (defined as the highest of (1) the prime rate, (2) one-month LIBOR plus 1.0% or (3) the Federal Funds Effective Rate) plus a spread from 0.5% to 1.0% .  In either case, the spread added to the applicable interest rate basis varies depending upon the amount of the monthly average undrawn availability under the facility.


Contingencies

We have accrued a liability and charged operations for the estimated costs of adjudication or settlement of various asserted and unasserted claims existing as of the balance sheet date, including those described below. We are currently a party to other legal actions arising from the normal course of business, none of which is expected to have a material adverse effect on our business, results of operations or financial condition.

Patent Matters

As is typical in the semiconductor and other high technology industries, from time to time others have asserted, and may in the future assert, that our products or manufacturing processes infringe their intellectual property rights.

We are engaged in litigation with Rambus, Inc. ("Rambus") relating to certain of Rambus' patents and certain of our claims and defenses. Our lawsuits with Rambus are pending in the U.S. District Court for the District of Delaware, U.S. District Court for the Northern District of California, Germany, France, and Italy. On August 28, 2000, we filed a complaint against Rambus in the U.S. District Court for the District of Delaware seeking declaratory and injunctive relief. The complaint alleges, among other things, various anticompetitive activities and also seeks a declaratory judgment that certain Rambus patents are invalid and/or unenforceable. Rambus subsequently filed an answer and counterclaim in Delaware alleging, among other things, infringement of twelve Rambus patents and seeking monetary damages and injunctive relief. We subsequently added claims and defenses based on Rambus' alleged spoliation of evidence and litigation misconduct. The spoliation and litigation misconduct claims and defenses were heard in a bench trial before Judge Robinson in October 2007. On January 9, 2009, Judge Robinson entered an opinion in our favor holding that Rambus had engaged in spoliation and that the twelve Rambus patents in the suit were unenforceable against us. Rambus subsequently appealed the decision to the U.S. Court of Appeals for the Federal Circuit. On May 13, 2011, the Federal Circuit affirmed Judge Robinson's finding of spoliation, but vacated the dismissal sanction and remanded the case to the Delaware District Court for analysis of the remedy based on the Federal Circuit's decision. On January 2, 2013, Judge Robinson entered a new opinion in our favor holding that Rambus had engaged in spoliation, that Rambus' spoliation was done in bad faith, that the spoliation prejudiced us, and that the appropriate sanction was to declare the twelve Rambus patents in the suit unenforceable against us.  On March 27, 2013, Rambus filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit. On January 13, 2006, Rambus filed a lawsuit against us in the U.S. District Court for the Northern District of California alleging that certain of our DDR2, DDR3, RLDRAM and RLDRAM II products infringe as many as fourteen Rambus patents and seeking monetary damages, treble damages, and injunctive relief. The Northern District of California Court stayed the trial of the patent phase of the Northern District of California case upon appeal of the Delaware spoliation issue to the Federal Circuit.

On September 1, 2011, HSM Portfolio LLC and Technology Properties Limited LLC filed a patent infringement action in the U.S. District Court for the District of Delaware against us and seventeen other defendants. The complaint alleges that certain of our DRAM and image sensor products infringe two U.S. patents and seeks damages, attorneys' fees, and costs.

On September 9, 2011, Advanced Data Access LLC filed a patent infringement action in the U.S. District Court for the Eastern District of Texas (Tyler) against us and seven other defendants. On November 16, 2011, Advanced Data Access filed an amended complaint. The amended complaint alleged that certain of our DRAM products infringed two U.S. patents and sought injunctive relief, damages, attorneys' fees, and costs. On March 20, 2013, we executed a settlement agreement resolving this litigation. The settlement amount did not have a material effect on our business, results of operations or financial condition.


17



On September 14, 2011, Smart Memory Solutions LLC filed a patent infringement action in the U.S. District Court for the District of Delaware against us and Winbond Electronics Corporation of America.  The complaint alleged that certain of our NOR Flash products infringed a single U.S. patent and sought injunctive relief, damages, attorneys' fees, and costs. On March 20, 2013, we executed a settlement agreement resolving this litigation. The settlement amount did not have a material effect on our business, results of operations or financial condition.

On December 5, 2011, the Board of Trustees for the University of Illinois filed a patent infringement action against us in the U.S. District Court for the Central District of Illinois. The complaint alleges that unspecified semiconductor products of ours infringe three U.S. patents and seeks injunctive relief, damages, attorneys' fees, and costs. We have filed three petitions for inter-partes review by the Patent and Trademark Office, challenging the validity of each of the patents in suit. The District Court has stayed the litigation pending the outcome of the inter-partes review by the Patent Office.

On March 26, 2012, Semiconductor Technologies, LLC filed a patent infringement action in the U.S. District Court for the Eastern District of Texas (Marshall) against us. The complaint alleged that certain of our DRAM products infringed five U.S. patents and sought injunctive relief, damages, attorneys' fees, and costs. On March 20, 2013, we executed a settlement agreement resolving this litigation. The settlement amount did not have a material effect on our business, results of operations or financial condition.

On April 27, 2012, Semcon Tech, LLC filed a patent infringement action against us in the U.S. District Court for the District of Delaware. The complaint alleges that our use of various chemical mechanical planarization systems purchased from Applied Materials and others infringes a single U.S. patent and seeks injunctive relief, damages, attorneys' fees, and costs.

Among other things, the above lawsuits pertain to certain of our SDRAM, DDR, DDR2, DDR3, RLDRAM, NAND Flash, NOR Flash and image sensor products, which account for a significant portion of our net sales.

We are unable to predict the outcome of assertions of infringement made against us and therefore cannot estimate the range of possible loss, except as noted in the discussion of the Advanced Data Access LLC, Smart Memory Solutions LLC and Semiconductor Technologies, LLC matters above. A court determination that our products or manufacturing processes infringe the intellectual property rights of others could result in significant liability and/or require us to make material changes to our products and/or manufacturing processes. Any of the foregoing could have a material adverse effect on our business, results of operations or financial condition.

Antitrust Matters

On May 5, 2004, Rambus filed a complaint in the Superior Court of the State of California (San Francisco County) against us and other DRAM suppliers which alleged that the defendants harmed Rambus by engaging in concerted and unlawful efforts affecting Rambus DRAM by eliminating competition and stifling innovation in the market for computer memory technology and computer memory chips.  Rambus' complaint alleged various causes of action under California state law including, among other things, a conspiracy to restrict output and fix prices, a conspiracy to monopolize, intentional interference with prospective economic advantage, and unfair competition. Rambus sought a judgment for damages of approximately $3.9 billion, joint and several liability, trebling of damages awarded, punitive damages, a permanent injunction enjoining the defendants from the conduct alleged in the complaint, interest, and attorneys' fees and costs. Trial began on June 20, 2011, and the case went to the jury on September 21, 2011. On November 16, 2011, the jury found for us on all claims. On April 2, 2012, Rambus filed a notice of appeal to the California 1st District Court of Appeal.


18



At least sixty-eight purported class action price-fixing lawsuits have been filed against us and other DRAM suppliers in various federal and state courts in the United States and in Puerto Rico on behalf of indirect purchasers alleging a conspiracy to increase DRAM prices in violation of federal and state antitrust laws and state unfair competition law, and/or unjust enrichment relating to the sale and pricing of DRAM products during the period from April 1999 through at least June 2002. The complaints seek joint and several damages, trebled, in addition to restitution, costs and attorneys' fees. A number of these cases have been removed to federal court and transferred to the U.S. District Court for the Northern District of California for consolidated pre-trial proceedings. In July, 2006, the Attorneys General for approximately forty U.S. states and territories filed suit in the U.S. District Court for the Northern District of California. The complaints allege, among other things, violations of the Sherman Act, Cartwright Act, and certain other states' consumer protection and antitrust laws and seek joint and several damages, trebled, as well as injunctive and other relief. On October 3, 2008, the California Attorney General filed a similar lawsuit in California Superior Court, purportedly on behalf of local California government entities, alleging, among other things, violations of the Cartwright Act and state unfair competition law. On June 23, 2010, we executed a settlement agreement resolving these purported class-action indirect purchaser cases and the pending cases of the Attorneys General relating to alleged DRAM price-fixing in the United States. Subject to certain conditions, including final court approval of the class settlements, we agreed to pay approximately $67 million in aggregate in three equal installments over a two-year period. We had paid the full amount into an escrow account by the end of the first quarter of 2013 in accordance with the settlement agreement.

Three putative class action lawsuits alleging price-fixing of DRAM products also have been filed against us in Quebec, Ontario, and British Columbia, Canada, on behalf of direct and indirect purchasers, asserting violations of the Canadian Competition Act and other common law claims (collectively the "Canadian Cases").  The claims were initiated between December 2004 (British Columbia) and June 2006 (Quebec). The plaintiffs seek monetary damages, restitution, costs, and attorneys' fees. The substantive allegations in these cases are similar to those asserted in the DRAM antitrust cases filed in the United States.  Plaintiffs' motion for class certification was denied in the British Columbia and Quebec cases in May and June 2008, respectively.  Plaintiffs subsequently filed an appeal of each of those decisions.  On November 12, 2009, the British Columbia Court of Appeal reversed, and on November 16, 2011, the Quebec Court of Appeal also reversed the denial of class certification and remanded the cases for further proceedings. On October 16, 2012, we entered into a settlement agreement resolving these three putative class action cases subject to certain conditions including final court approval of the settlement. The settlement amount did not have a material effect on our business, results of operations or financial condition.

On June 21, 2010, the Brazil Secretariat of Economic Law of the Ministry of Justice ("SDE") announced that it had initiated an investigation relating to alleged anticompetitive activities within the DRAM industry. The SDE's Notice of Investigation names various DRAM manufacturers and certain executives, including us, and focuses on the period from July 1998 to June 2002.

We are unable to predict the outcome of these matters and therefore cannot estimate the range of possible loss, except as noted in the U.S. indirect purchaser cases and the Canadian Cases above. The final resolution of these alleged violations of antitrust laws could result in significant liability and could have a material adverse effect on our business, results of operations or financial condition.

Commercial Matters

On January 20, 2011, Dr. Michael Jaffé, administrator for Qimonda AG ("Qimonda") insolvency proceedings, filed suit against us and Micron Semiconductor B.V., our Netherlands subsidiary, in the District Court of Munich, Civil Chamber. The complaint seeks to void under Section 133 of the German Insolvency Act a share purchase agreement between us and Qimonda signed in fall 2008 pursuant to which we purchased all of Qimonda's shares of Inotera Memories, Inc. and seeks an order requiring us to retransfer the Inotera shares purchased from Qimonda to the Qimonda estate. The complaint also seeks to terminate under Sections 103 or 133 of the German Insolvency Code a patent cross license between us and Qimonda entered into at the same time as the share purchase agreement. A three-judge panel will render a decision after a series of hearings with pleadings, arguments and witnesses. Hearings were held on September 25, 2012, February 5, 2013, June 11, 2013 and July 2, 2013. An additional hearing is scheduled for October 8, 2013. We are unable to predict the outcome of this lawsuit and therefore cannot estimate the range of possible loss. The final resolution of this lawsuit could result in the loss of the Inotera shares or equivalent monetary damages and the termination of the patent cross license, which could have a material adverse effect on our business, results of operation or financial condition. As of May 30, 2013, the Inotera shares purchased from Qimonda had a carrying value of $143 million.


19



Other

In the normal course of business, we are a party to a variety of agreements pursuant to which we may be obligated to indemnify the other party. It is not possible to predict the maximum potential amount of future payments under these types of agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. Historically, our payments under these types of agreements have not had a material adverse effect on our business, results of operations or financial condition.

Under the Sponsor Agreement, we have provided payment guarantees related to financing of capital expenditures. (See "Pending Acquisition of Elpida Memory, Inc." note.)


Micron Shareholders' Equity and Noncontrolling Interests in Subsidiaries

Changes in the components of equity were as follows:
 
 
Nine Months Ended May 30, 2013
 
Nine Months Ended May 31, 2012
 
 
Attributable to Micron
 
Noncontrolling Interests
 
Total Equity
 
Attributable to Micron
 
Noncontrolling Interests
 
Total Equity
Beginning balance
 
$
7,700

 
$
717

 
$
8,417

 
$
8,470

 
$
1,382

 
$
9,852

 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
(518
)
 
2

 
(516
)
 
(789
)
 

 
(789
)
Other comprehensive income (loss)
 
(11
)
 
1

 
(10
)
 
(52
)
 
(5
)
 
(57
)
Comprehensive income (loss)
 
(529
)
 
3

 
(526
)
 
(841
)
 
(5
)
 
(846
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition of noncontrolling interests
 

 

 

 

 
(466
)
 
(466
)
Contribution from noncontrolling interests
 

 
11

 
11

 

 
151

 
151

Distributions to noncontrolling interests
 

 
(33
)
 
(33
)
 

 
(387
)
 
(387
)
Capital and other transactions attributable to Micron
 
157

 

 
157

 
182

 

 
182

Ending balance
 
$
7,328

 
$
698

 
$
8,026

 
$
7,811

 
$
675


$
8,486


2013 Capped Call Transactions

Concurrent with the issuance of the 2033E and 2033F Notes, on February 6, 2013 and February 12, 2013, we entered into capped call transactions (the "2013E Capped Calls" and "2013F Capped Calls," collectively the "2013 Capped Calls") that have an initial strike price of approximately $10.93 per share, subject to certain adjustments, which was set to equal the initial conversion price of the 2033 Notes. The 2013 Capped Calls have a cap price of $14.51 per share and cover, subject to anti-dilution adjustments similar to those contained in the 2033 Notes, an approximate combined total of 54.9 million shares of common stock. The 2013E Capped Calls expire on various dates between January and February 2018, and the 2013F Capped Calls expire on various dates between January and February 2020. The 2013 Capped Calls are intended to reduce the effect of potential dilution upon conversion of the 2033 Notes. The 2013 Capped Calls may be settled in shares or cash, at our election. Settlement of the 2013 Capped Calls in cash on their respective expiration dates would result in us receiving an amount ranging from zero , if the market price per share of our common stock is at or below $10.93 , to a maximum of $196 million if the market price per share of our common stock is at or above $14.51 . We paid $48 million to purchase the 2013 Capped Calls. The 2013 Capped Calls are considered capital transactions and the related cost was recorded as a charge to additional capital.


20



2009 Capped Call Transactions

Concurrent with the issuance in April 2009 of our 4.25% Convertible Senior Notes due 2013, we entered into capped call transactions (the "2009 Capped Calls") covering approximately 45.2 million shares of common stock with an initial strike price of approximately $5.08 per share and a cap price of $6.64 per share.  The 2009 Capped Calls expired in October, 2012 and November, 2012 .  We elected cash settlement and received $24 million in the first quarter of 2013.

Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss), net of tax, attributable to Micron shareholders at the end of each period, as well as other comprehensive income for the nine months ended May 30, 2013 , were as follows:

 
 
As of
August 30,
2012
 
Other Comprehensive Income
 
As of
May 30,
2013
Cumulative foreign currency translation adjustments
 
$
49

 
$
2

 
$
51

Gain (loss) on derivatives, net
 
31

 
(10
)
 
21

Gain (loss) on investments, net
 
1

 
(2
)
 
(1
)
Pension liability adjustments
 
(1
)
 
(1
)
 
(2
)
Accumulated other comprehensive income
 
$
80

 
$
(11
)
 
$
69



Derivative Financial Instruments

We are exposed to currency exchange rate risk for monetary assets and liabilities held or denominated in foreign currencies, primarily the euro, shekel, Singapore dollar and yen.  We are also exposed to currency exchange rate risk for capital expenditures and operating cash flows, primarily denominated in the euro and yen.  In connection with the Sponsor Agreement and Rexchip Share Purchase Agreement entered into in July 2012, we are exposed to significant currency exchange rate risk for the yen and New Taiwan dollar. We use derivative instruments to manage a portion of our exposures to changes in currency exchange rates.  For exposures associated with our monetary assets and liabilities, our primary objective in entering into currency derivatives is to reduce the volatility that changes in currency exchange rates have on our earnings.  For exposures associated with our capital expenditures and operating cash flows, our primary objective of entering into currency derivatives is to reduce the volatility that changes in currency exchange rates have on future cash flows. For exposures associated with our yen or New Taiwan dollar denominated payment obligations under the Sponsor Agreement and Rexchip Share Purchase Agreement, our primary objective for entering into currency derivatives is to mitigate risks if those currencies strengthen relative to the U.S. dollar, while preserving some ability for us to benefit if those currencies weaken.

Our derivatives consist primarily of currency forward contracts and currency options.  The derivatives expose us to credit risk to the extent the counterparties may be unable to meet the terms of the derivative instrument.  As of May 30, 2013 , our maximum exposure to loss due to credit risk if counterparties fail completely to perform according to the terms of the contracts, was generally equal to the fair value of our assets for these contracts as listed in the tables below.  We seek to mitigate such risk by limiting our counterparties to major financial institutions and by spreading risk across multiple major financial institutions.  In addition, we monitor the potential risk of loss with any one counterparty resulting from this type of credit risk on an ongoing basis.  We have the following currency risk management programs:

Currency Derivatives without Hedge Accounting Designation

We utilize a rolling hedge strategy with currency forward contracts that generally mature within 35 days to hedge our exposure to changes in currency exchange rates from our monetary assets and liabilities.  At the end of each reporting period, monetary assets and liabilities held or denominated in currencies other than the U.S. dollar are remeasured in U.S. dollars and the associated outstanding forward contracts are marked-to-market.  Currency forward contracts are valued at fair values based on the middle of bid and ask prices of dealers or exchange quotations (Level 2 fair value measurements).  Realized and unrealized gains and losses on derivative instruments and the underlying monetary assets and liabilities are included in other non-operating income (expense).


21



In connection with the currency exchange rate risk with the Sponsor Agreement and Rexchip Share Purchase Agreement, we entered into the Original Elpida Hedges that were settled on March 26, 2013 and currency options that expired on April 2, 2013, respectively. On March 26, 2013, we entered into the New Elpida Hedges that expire on September 25, 2013 to hedge our exposure to the yen-denominated acquisition payments. On April 9, 2013, we purchased currency call options that expire on September 25, 2013 to hedge our exposure to the New Taiwan dollar acquisition payment. (See "Pending Acquisition of Elpida Memory, Inc. – Currency Hedging" note.) Currency options are valued at their fair value using a modified Black-Scholes option valuation model using inputs of the current spot rate, strike price, risk-free interest rate, time to maturity, volatility and credit-risk spread (Level 2 fair value measurements).  These options are marked-to-market at the end of each reporting period and realized and unrealized gains and losses are included in other non-operating income (expense).

Total gross notional amounts and fair values for currency derivatives without hedge accounting designation were as follows:

As of May 30, 2013
 
Notional
Amount
(in U.S.
Dollars)
 
Fair Value of
Asset
 
(Liability)
Forward contracts:
 
 
 
 
 
 
Yen
 
$
916

 
$

 
$
(86
)
Singapore dollar
 
242

 
1

 
(3
)
Euro
 
206

 
1

 
(3
)
Shekel
 
76

 

 
(1
)
Currency options:
 
 
 
 
 
 
Yen
 
849

 
61

 

New Taiwan dollar
 
351

 

 

 
 
$
2,640

 
$
63

 
$
(93
)
 
 
 
 
 
 
 
As of August 30, 2012
 
 

 
 

 
 

Forward contracts:
 
 
 
 
 
 
Yen
 
$
18

 
$

 
$

Singapore dollar
 
251

 

 
(1
)
Euro
 
173

 
2

 
(1
)
Shekel
 
65

 

 
(1
)
Currency options:
 
 
 
 
 
 
Yen
 
5,050

(1)  
57

 

New Taiwan dollar
 
342

 
2

 

 
 
$
5,899

 
$
61


$
(3
)
(1)  
Notional amount includes purchased options of $2,527 million and sold options of $2,523 million .

For currency forward contracts and options without hedge accounting designation, we recognized net losses of $50 million and $223 million for the third quarter and first nine months of 2013 , respectively, and net losses of $11 million and $28 million for the third quarter and first nine months of 2012 , respectively, which were included in other non-operating income (expense).


22



Currency Derivatives with Cash Flow Hedge Accounting Designation

We utilize currency forward contracts that generally mature within 12 months and currency options that generally mature from 12 to 18 months to hedge our exposure to changes in cash flows from changes in currency exchange rates for certain capital expenditures and forecasted operating cash flows.  Currency forward contracts are valued at their fair values based on market-based observable inputs including currency exchange spot and forward rates, interest rate and credit risk spread (Level 2 fair value measurements).  Currency options are valued at their fair value using a modified Black-Scholes option valuation model using inputs of the current spot rate, strike price, risk-free interest rate, time to maturity, volatility and credit-risk spread (Level 2 fair value measurements). For derivatives designated as cash flow hedges, the effective portion of the realized and unrealized gain or loss on the derivatives is included as a component of accumulated other comprehensive income (loss).  For derivatives hedging capital expenditures, the amounts in accumulated other comprehensive income (loss) for these cash flow hedges are reclassified into earnings in the same line items of the consolidated statements of operation and in the same periods in which the underlying transactions affect earnings. Amounts in accumulated other comprehensive income (loss) for inventory purchases are reclassified to earnings when inventory is sold. The ineffective or excluded portion of the realized and unrealized gain or loss is included in other non-operating income (expense).  Total gross notional amounts and fair values for currency derivatives with cash flow hedge accounting designation were as follows:

 
 
Notional
Amount
(in U.S.
Dollars)
 
Fair Value of
As of May 30, 2013
 
 
Asset
 
(Liability)
Forward contracts:
 
 
 
 
 
 
Yen
 
$
20

 
$

 
$
(2
)
Euro
 
13

 

 

Currency options:
 
 
 
 
 
 
Yen
 
35

 

 
(3
)
 
 
$
68

 
$

 
$
(5
)
 
 
 
 
 
 
 
As of August 30, 2012
 
 

 
 

 
 

Forward contracts:
 
 
 
 
 
 
Yen
 
$
108

 
$
2

 
$

Euro
 
35

 

 

Currency options:
 
 
 
 
 
 
Yen
 
32

 

 

 
 
$
175

 
$
2

 
$


For the third quarter and first nine months of 2013 , we recognized net pre-tax derivative losses of $3 million and $9 million , respectively, in accumulated other comprehensive income (loss) from the effective portion of cash flow hedges.  For the first nine months of 2012 , we recognized net pre-tax derivative losses of $11 million in accumulated other comprehensive income (loss) from the effective portion of cash flow hedges.  The ineffective and excluded portions of cash flow hedges recognized in other non-operating income (expense) were not significant for the third quarters or first nine months of 2013 or 2012.  In the first nine months of 2013 , $2 million of pre-tax net gains were reclassified from accumulated other comprehensive income (loss) to earnings.  For the third quarter and first nine months of 2012 , $2 million and $6 million , respectively, of pre-tax net gains were reclassified from accumulated other comprehensive income (loss) to earnings. As of May 30, 2013 , the amount of pre-tax net derivative gains included in accumulated other accumulated comprehensive income (loss) expected to be reclassified into earnings in the next 12 months was $3 million .


23



Master Netting Arrangements

We seek to enter into master netting arrangements to mitigate credit risk in derivative transactions. These master netting arrangements allow us and our counterparties to net settle amounts owed to each other. Derivative assets and liabilities that can be net settled under these arrangements have been presented in our consolidated balance sheet on a net basis. The following table presents the gross amounts of our derivative assets and liabilities and the net amounts recorded in our consolidated balance sheet:

As of May 30, 2013
 
Assets (1)
 
Liability (2)
Gross amount
 
$
63

 
$
(98
)
Gross amounts offset in the statement of financial position
 
(62
)
 
62

Net amounts presented in the statement of financial position
 
$
1

 
$
(36
)
(1) Included in receivables - other.
(2) Included in accounts payable and accrued expenses - other.


Fair Value Measurements

Accounting standards establish three levels of inputs that may be used to measure fair value: quoted prices in active markets for identical assets or liabilities (referred to as Level 1), inputs other than Level 1 that are observable for the asset or liability either directly or indirectly (referred to as Level 2) and unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities (referred to as Level 3).

Fair Value Measurements on a Recurring Basis

All marketable debt and equity investments are classified as available-for-sale and are carried at fair value. Assets measured at fair value on a recurring basis were as follows:

As of
 
May 30, 2013
 
August 30, 2012
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
$
2,018

 
$

 
$

 
$
2,018

 
$
2,159

 
$

 
$

 
$
2,159

Commercial paper
 

 
54

 

 
54

 

 
29

 

 
29

Certificates of deposit
 

 
32

 

 
32

 

 
27

 

 
27

Government securities
 

 

 

 

 

 
5

 

 
5

 
 
2,018

 
86

 

 
2,104

 
2,159

 
61

 

 
2,220

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
 

 
45

 

 
45

 

 
31

 

 
31

Government securities
 

 
41

 

 
41

 

 
51

 

 
51

Commercial paper
 

 
25

 

 
25

 

 
10

 

 
10

Certificates of deposit
 

 
1

 

 
1

 

 
4

 

 
4

Asset-backed securities
 

 

 

 

 

 
4

 

 
4

 
 

 
112

 

 
112

 

 
100

 

 
100

Long-term marketable investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
 

 
211

 

 
211

 

 
203

 

 
203

Asset-backed securities
 

 
72

 

 
72

 

 
73

 

 
73

Government securities
 

 
55

 

 
55

 

 
88

 

 
88

Marketable equity securities
 
7

 
2

 

 
9

 
5

 
5

 

 
10

 
 
7

 
340

 

 
347

 
5

 
369

 

 
374

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
2,025

 
$
538

 
$

 
$
2,563

 
$
2,164

 
$
530

 
$

 
$
2,694


24




Government securities consist of securities issued directly by or deemed to be guaranteed by government entities such as U.S. and non-U.S. agency securities, government bonds and treasury securities. Level 2 securities are valued using information obtained from pricing services, which obtain quoted market prices for similar instruments, non-binding market consensus prices that are corroborated by observable market data, or various other methodologies, to determine the appropriate value at the measurement date. We perform supplemental analysis to validate information obtained from our pricing services. As of May 30, 2013 , no adjustments were made to such pricing information.

Fair Value Measurements on a Nonrecurring Basis

During the third quarter of 2012, we identified events and circumstances that significantly impacted the fair value of our equity investment in Transform. As a result, we measured the fair value of our investment in Transform based on liquidation values of its assets and liabilities using unobservable inputs. For the third quarter of 2012, we recognized an other than temporary impairment charge of $69 million which reduced the carrying value of our investment in Transform to zero . (Also see "Restructure and Asset Impairments" note.)

Fair Value of Financial Instruments

Amounts reported as cash and equivalents, receivables, and accounts payable and accrued expenses approximate fair value. The estimated fair value and carrying value of debt instruments (carrying value excludes the equity components of our convertible notes classified in equity) were as follows:

As of
 
May 30, 2013
 
August 30, 2012
 
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
Convertible notes
 
$
3,825

 
$
2,484

 
$
2,669

 
$
2,321

Other notes
220

 
228

 
56

 
58


The fair values of our convertible debt instruments were determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, including our stock price and interest rates based on similar debt issued by parties with credit ratings similar to ours (Level 2).  The fair value of our other debt instruments was estimated based on discounted cash flows using inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, including interest rates based on similar debt issued by parties with credit ratings similar to ours (Level 2).


Equity Plans

As of May 30, 2013 , we had an aggregate of 169.9 million shares of common stock reserved for the issuance of stock options and restricted stock awards, of which 94.2 million shares were subject to outstanding awards and 75.7 million shares were available for future awards.  Awards are subject to terms and conditions as determined by our Board of Directors.

Stock Options

We granted 0.3 million and 17.6 million stock options during the third quarter and first nine months of 2013 , respectively, with weighted-average grant-date fair values per share of $4.79 and $3.29 , respectively. We granted 0.8 million and 21.2 million stock options during the third quarter and first nine months of 2012 , respectively, with weighted-average grant-date fair values per share of $3.66 and $3.18 , respectively.


25



The fair values of option awards were estimated at each grant date using the Black-Scholes option valuation model.  The Black-Scholes model requires the input of assumptions, including the expected stock-price volatility and estimated option life.  The expected volatilities utilized were based on implied volatilities from traded options on our stock and on historical volatility.  The expected lives of options granted were based, in part, on historical experience and on the terms and conditions of the options.  The risk-free interest rates utilized were based on the U.S. Treasury yield in effect at each grant date.  No dividends were assumed in estimated option values.  Assumptions used in the Black-Scholes model are presented below:

 
 
Quarter Ended
 
Nine Months Ended
 
 
May 30,
2013
 
May 31,
2012
 
May 30,
2013
 
May 31,
2012
Average expected life in years
 
4.8

 
5.0

 
5.1

 
5.1

Weighted-average expected volatility
 
55
%
 
61
%
 
60
%
 
66
%
Weighted-average risk-free interest rate
 
0.7
%
 
0.9